3 Years To Freedom – Guest Post

[Editor’s Note: Although most of my readers are doctors or those in the medical training pipeline, there are quite a few readers of other professions and I certainly appreciate them and accept guest posts from them. This one is from an attorney, and I accepted it mostly because it gives me a chance to tell my favorite lawyer joke-

What would you do if you were stuck in an elevator with a python, a tiger, and a lawyer and you only had two bullets left in your gun?

Shoot the lawyer twice, of course.

In all seriousness though, the problem of ridiculous tuition increases and unfavorable loans affects attorneys just as much as doctors. At least the doctors can get jobs with their degrees, unlike many unfortunate recent law school grads who are suffering through high debt loads WITHOUT a high paying job. At any rate, this post comes from a friend who recently told me he paid off his law school debt. I suggested he write a guest post about it, and surprisingly, he did! Now we all get to reap the fruits of his wisdom and success. As with all guest posts, I expect you to be very nice in the comments section to encourage more people to share their success stories.]

Three Years and 124K: How to Pay Off Student Loans

Doctors are not the only professionals drowning in student debt; law students tend to rack up a significant amount of debt as well (although, admittedly, not as much as doctors). While our professions are different, some of the decisions I made regarding how I approached my debt are equally applicable to doctors. Three years ago, on November 15, 2009, I went into repayment on $124,190 of student loans incurred while attending law school, and made my last payment on the loans at the beginning of November 2012.

Background

Over the course of three years of law school, I took out about $116K in student loans to help pay tuition and living expenses. My wife had just given birth to our oldest son a few months before I started school, and the combination of student loans, savings, and summer earnings paid our tuition and expenses. Frankly, the amount of debt would have been much higher had I not qualified for need-based financial assistance provided by alumni donations and endowment earnings. The loans came from a variety of sources, including Stafford Loans, a Perkins loan, school loans and private loans, with half of the loans subsidized. I accrued interest that was added to the principal on the other half of the loans, and by the time I went into repayment I had seven separate loans totaling $124,190 from four different lenders, with interest rates ranging from 4.25% to 7%. Under a 10 year repayment plan, the total of my four different monthly loan payments was $1,377 per month.

Attacking The Problem

My law school has a very generous low income loan repayment program, but I was hoping to avoid relying on it. My view was that I took the loans out, and I was going to pay them back, which while irrational from a financial perspective it was what I wanted to do and I had to choose the appropriate employment opportunity. Having the student loan burden that I did, I had to look at the higher paying, higher hour legal positions available and I only seriously considered taking a position in a large law firm in a major market. Even with the burden of long work hours (there are times that I wish I had gone into emergency medicine), I am happy where I am at, and plan on staying at my firm for a while, but I may have missed out on something else simply because I was very focused on paying off my student loans quickly. For some perspective, in the legal field, small firm associates and entry-level government positions pay from $40K to $60K per year, larger firms in mid-size legal markets (all but the 20 largest cities in the U.S.) pay from $80K to $120K, and the current New York market salary for first-year associates is $160K. I am fortunate to be able to work at a New York-based firm that pays the New York market salary.

Even with a starting salary of $160K per year, paying $1,377 of my after-tax, after-charity income each month was a significant burden, both emotionally and financially, and I was able to attack this burden in four ways:

Sue more doctors (just kidding, I am a tax attorney and I strive to keep my clients far away from the courtroom);

Keep cost-of-living down;

Make reasonable payments at the beginning; and

Increase payments at each opportunity.

Minimize Your Cost of Living

If you want/need to pay down debt, think first about where you’ll live. State taxes will take a greater bite out of your ability to pay down student loans than you might imagine. If you don’t believe me, look at your pay stub to see how much you’ve already paid in state and local taxes for the year. Marginal state and local income tax rates in some states are over 10%. In deciding where to start my career, I ultimately chose to move to Texas instead of accepting a job in California, in part for the lower taxes and cost of living. This decision alone saves me over $2000 a month.

Even beyond location, consider your other expenses, especially housing. Only buy or rent what you need (which is generally less than you can afford) when starting out. My wife and I ended up purchasing a much more reasonable home than some of my co-workers with the specific goal of paying down our debt faster. Six people in a modest home is tight at times, but lowering our monthly housing costs $1,000 per month compared to peers allowed us to put $1,000 extra each month towards student loans. Now that the debt is gone, we are looking forward to moving into a nicer home sometime in the next few years.

Make Reasonable Payments

Most student loans default to a 10 year repayment program, but can easily be consolidated into 30 year loans. We stuck with the 10-year plan, because I figured as long as I could afford to make that payment, I was going to keep making it in order to be done in 10 years. It might be that I was more sensitive emotionally to having non-housing debt than others, but I didn’t want to even think about the possibility of making student loan payments while trying to be in a position to help my kids get through college. Even if my interest rates were lower, I still would have tried to pay the loans off sooner (even if it was not the wisest decision from a financial perspective) to get rid of the emotional burden of student loans.

Increase Payments at Each Opportunity

My highest loan rate was 7%, and each additional payment on that loan provided a guaranteed 7% return on investment. With that in mind, I started making additional payments on the highest interest loans as soon as I could. With my repayment schedule, I quickly calculated that paying an additional $1,000 per month towards my loans (beyond the $1,377) could drop my repayment period from 10 years to 5 years, and so I started with that as my goal. The first year, all we were able to manage was to pay an additional $1,000 per month towards the loans, but that put us on track to paying them off earlier and seeing the loan balances fall provided additional motivation to keep paying them off. In the second year, I had a small salary increase, a tax refund and a small, unexpected bonus, all of which were applied to making additional payments on the loans. My income went up again during the third year, and I used that to help pay off the remaining loans. Using all unexpected/unbudgeted income towards loan repayments was not “fun” from the perspective of enjoying good meals, nice trips or better transportation, but it was fun to see loan balances fall and to see our scheduled repayment period fall at the same time. Keeping to our first year budget even when our income subsequently went higher allowed us to pay our loans off faster without having to feel like we were sacrificing. [Editor’s Note: $2377 per month on a $160K salary is about 18% of income going toward student loans.]

Final Words

I had classmates that paid similar amounts of debt off much sooner than I did by taking more extreme measures along the lines of eating ramen noodles for a year and taking in several roommates. During the three years we were paying off loans, we bought a house, added two children, traveled, bought a minivan and lived reasonably well. By developing a plan to pay off the loans, being disciplined enough to stick to the plan, and taking advantage of opportunities to make additional payments, (along with a little luck,) we paid off our loans much faster than we could have imagined.

Have you paid off your loans? How long did it take? What “secrets” did you employ to pay them off sooner? Comment below!

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2 comments

That is mighty frugal and might well done. Alas not me. Even though I went the military route I still graduated with about 55-60K in student loans. In residency we could only afford to pay the interest as the cost of living in Hawaii (my residency location) was astounding and we paid for a little over two more years of undergraduate training to allow my wife to finish her degree as well. A focused WCI reader would have paid off the remainder if my final three years of military service but alas I did not see the fiscal light until near the end of my military commitment. Thankfully I have whittled that sum down to close to 45K with a plan to have it paid off in 2-5 years depending on how my new civilian practice grows.

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